How money managers see global markets

Trade war, China devaluation, tech selloff top the worry list


SINGAPOREBeware higher bond yields, watch for a stronger dollar, and steer clear of credit.

Those are some of the biggest consensus calls from London’s money managers as they navigate financial markets rocked by central bank tightening, the threat of trade wars, and concern global growth has already passed its high water mark.

In the week that 10-year US Treasury yields climbed above 3% for the first time in four years and the dollar hit its strongest level since January, Bloomberg took the pulse of some 20 traders and money managers in the City. The following is a look at their cross-asset views and the risks they’re monitoring.

Dollar Dilemma

The vast majority of Londonbased funds agree that more dollar strength is likely for the weeks ahead.

That’s reflected in the broader market: Commodity Futures Trading Commission data show net non-commercial positioning remains bearish on the greenback, even after recent gains took the Bloomberg Dollar Spot Index to levels last seen in January.

Dollar bulls will be encouraged by US yields, which, buoyed by the US Federal Reserve’s tightening monetary policy, are starting to reassert their influence over the currency. The correlation between rates on two-year US Treasury notes and the dollar is firmly back in positive territory after turning negative in February and March for the first time in more than a year.

Bond Woes

London-based hedge-fund managers are putting their faith in bear-steepeners in the US — a bond sell-off with yields on the longest-maturity debt leading the way. Still, the so-called real-money sector is less convinced. One key concern among the former is that investor appetite for Treasuries is faltering just as the US ramps up issuance. As a result, London traders are keenly monitoring demand at Treasury auctions for signs of ebbing demand.

Stock Nerves

There’s a notable divide among London’s market participants when it comes to equities: Hedge-fund managers, typically faster to react to changes in the macro environment, are inclined to be more bearish than slower-moving realmoney managers.

After cresting at a record high on Jan 29, the MSCI All-Country World Index has lost more than 7%, raising concern that the long-term bull market may be coming to an end. Worries that the tech sector, which dominates US equity markets, is overvalued and losing momentum are oft-cited in London as a reason to beware further stockmarket weakness.

That isn’t the only misgiving surrounding higher-yielding assets, though. The consistent view from those who attended this month’s Washington Group of 20/International Monetary Fund meetings was that the probability of a detrimental trade war is far greater than seems to be priced into markets.

Escalating protectionism could once again become a key risk.

Currency Calls

London money managers fear the broader market has an overly-complacent conviction that the US will avoid a hard line on trade, a concern that’s leading them to the view a trade war will only be averted with major concessions from the Chinese.

Credit, Crunched

Credit bulls are an extinct species in London. Not everyone is abandoning the asset class, but very few see scope for gains, given the narrowing in credit spreads.

Emerging Bulls

Finally, there’s a jarring inconsistency in the view on emerging markets (EMs). Despite hedge fund managers predicting higher yields and lower global growth, and being generally negative on credit and equities — which are all normally bad for EM — no-one seemed particularly concerned on developing markets themselves.

A number of people highlighted Turkey as providing an opportunity ahead of its summer election. In that market at least, it seems the lure of yields at 13% is hard for London’s investors to ignore. — Bloomberg